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Over the past few years there has been an increase in the popularity of online shopping. While the majority of businesses that compete in this space are brick and mortar businesses with an online store, there are still a few companies that compete as "online only" retailers. Two of those companies are eBay Inc. (NASDAQ:EBAY), and Amazon.com Inc. (NASDAQ:AMZN).

Though they operate with slightly different business models and have a range of competitors outside their core e-retailing space, they do still compete in the same core industry - online retail. Amazon operates primarily as an online reseller, but also competes in other spaces as it produces and markets its own brand of tablet (Kindle), and offers its own proprietary web services. eBay on the other hand operates primarily as an online marketplace which allows consumers to buy and sell their own products via auction format, and offers its own payment system (PayPal), which can be used with numerous retailers online. Though the companies themselves have very similar operations, their stocks trade very differently. To better evaluate the attractiveness of both companies I will use a series of profitability and valuation techniques.

Profitability

eBay

Amazon

Gross Profit Margin

70.30%

22.44%

Operating Profit Margin

20.37%

1.79%

Net Profit Margin

27.72%

1.34%

When examining the two companies on profitability using three popular profitability ratios (Gross profit Margin, Operating Profit Margin, and Net Profit Margin) it's clear to see that eBay is the more profitable company. Since eBay just provides the marketplace and not the actual product, it has no product costs. Its only costs of revenue are the ones associated with providing the online market place and payment system to consumers. Whereas Amazon, as a reseller, has those same costs in addition to the cost of products it is purchasing and then reselling. Although eBay had a Net Profit Margin of 27%, it was mostly aided by a gain on the sale of Skype to Microsoft (NASDAQ:MSFT). If we back out the $1.4 million gain from the sale, eBay then would have a Net Profit Margin of 18%, much lower than their current 27% but higher than Amazon's 1.3%.

Valuation

eBay

Amazon

Share Price

$36.25

$179.30

P/E Ratio

20.55

130

PEG Ratio

1.56

4.85

eBay shares also trade at a much cheaper valuation than Amazon shares. eBay trades at $36.25 or 20.55 times current earnings, which is in line with the rest of the online names. Amazon trades at $179.30, or an outrageous 130 times earnings, which is a high valuation even for a technology based growth company. Factoring in the future growth of both companies we can evaluate each stock's PEG ratio, a measure of a company's price-to-earnings ratio in relation to its future earnings growth. The PEG ratio for eBay is just 1.56- a moderately low valuation, while the PEG ratio for Amazon is an overvalued 4.85. This just confirms how attractive eBay's price level is in comparison with that of rival Amazon. Both Amazon's P/E and PEG ratio act as support that the stock's current price of $179.30 is overvalued. eBay offers a much safer investment, as the operations are much more efficient than Amazon's and the stock trades at a much lower earnings multiple as well.

eBay

Amazon

Price/Book Ratio

2.60

10.5

Price/Sales Ratio

4.00

1.70

Enterprise Value to EBITDA

18

90

Although eBay is trading more attractively than Amazon in relation to its underlying earnings, the results are mixed when comparing the company's price to other underlying measures. For instance eBay has a price-to-book value ratio of 2.60, which is far lower than Amazon's price-to-book value ratio of 10.5. However when comparing the share price to underlying sales, we actually see that Amazon has a much lower valuation than eBay. Amazon shares are only trading at 1.7 times revenue, while eBay trades at 4 times revenue. This is not surprising as Amazon has been growing its revenue roughly 40% each year- Amazon's problem is not in its sales numbers but profits. One final valuation metric is the Enterprise Value to EBITDA valuation technique. This valuation tool takes the enterprise value of a company, which is essentially an expanded market capitalization value, and divides it by the company's EBITDA. In this case, eBay has a much lower valuation based on its EV to EBITDA valuation - 18 times as opposed to 90 times for Amazon shares.

Summary

Amazon has been growing revenue at a rapid pace of late, and has been investing in the infrastructure needed to support growth. This is evidenced by the 83% increase in the net amount of property, plant and equipment on Amazon's Balance Sheet from 2010 to 2011. This also undoubtedly contributed to Amazon's increased expenses in 2011. However these costs will need to create much more efficient operations in the future for me to be a buyer of Amazon. I feel the shares are still far too overvalued at this price range, and even if the company can lower expenses I don't feel it will have enough of an impact on the share valuation to make me view it as a fair or even cheap valuation. eBay on the other hand also has attractive growth options, most notably in the payments sector as PayPal looks to move into mobile and even physical payment formats. However shares of eBay trade at a much more attractive valuation - 20 times current earnings and 18 times next year's earnings. While they both operate in similar sectors, the fact that eBay never holds inventory and operates solely in an online space, gives it a great advantage over Amazon. eBay benefits from very low costs of revenue and also from its Payments segment where PayPal continues to expand into new markets and formats. For this reason I would favor eBay shares over those of Amazon in the online retailing space.

Source: In The Online Retailing Space - Buy eBay, Not Amazon